Submission of the Competition Commission and Competition Tribunal on the

Submission of the Competition Commission and Competition Tribunal on the

Convergence Bill (B9-2005) for consideration by the Portfolio Committee on Communications

1. Introduction

1.1 The Competition Commission welcomes the opportunity to make this written submission to the communications Portfolio Committee on the Convergence Bill (the Bill) and also wishes to indicate its desire to make an oral presentation to the Committee once the hearing dates have been set.

1.2 The Commission welcomes the move to adopt convergence legislation, the importance of which is beyond question. The Competition Commission and Competition Tribunal made submissions to the Department of Communication (DoC) in the past on various versions of the Bill and some of the concerns raised were addressed adequately. However, there are still very important concerns that have not been addressed, hence the reason for this submission and the need for an oral presentation by ourselves to help clarify issues.

1.3 This submission will summarise the Competition Commission and Competition Tribunal’s concerns pertaining to the current version of the Bill and will also indicate what needs to be done to resolve the outstanding issues. We begin by presenting a general comment on the Bill in the next section. Section 3 then discusses our specific concerns and a summary is provided in section 4.

General comment

From a competition perspective, the Convergence Bill is a welcome move, one that is long overdue. It is expected that the Bill will usher in a new era in the communications industry by adopting a technology-neutral stance. The Bill aims at, among other things, the promotion of competition, encouraging investment and innovation in the communications sector, facilitating the convergence of telecommunications and broadcasting signal distribution sectors as well as promoting the development of public, community and commercial broadcasting services. In terms of the Bill, communications licences will no longer be granted on the basis of a specific technology. Instead, players will be able to compete within a broader communications market. Service, as opposed to the type of technology used, is what matters in a converged environment.

Provisions relating to interconnection and communications facilities leasing obligations are necessary to ensure an environment of open, fair and non-discriminatory access to communications networks and facilities. This is in the spirit of fair competition and is laudable. Also, issues of number portability and carrier pre-selection, if regulated correctly, can stimulate competition to the benefit of consumers.

2.3 Convergence has far-reaching implications for competition and regulatory policy. For instance, it encourages the adoption of complex business models that blur the traditional market boundaries, as we know them. This poses major challenges from a regulatory perspective, especially for purposes of accurately defining a ‘relevant antitrust market’. This calls for robust, properly structured, well-resourced and independent regulatory institutions that are not only able to keep abreast of developments in the sector, but also make firm and credible decisions that can stand up to the strictest scrutiny. The Bill goes far in ensuring the independence of ICASA by separating the policy making and regulatory roles of the Ministry and the Authority respectively.

With convergence, there may also come a new wave of ‘vertical’ and ‘horizontal’ mergers as firms take advantage of economies of scale and scope. Since this Bill promotes competition by encouraging entry into the communications sector, where competition has been introduced it is the duty of the competition authorities and sector regulators to ensure that such competition is cultivated and maintained. Thus in this regard, mergers and acquisitions that would result in high concentration levels that could lessen competition should be carefully scrutinised and so should licence applications that might result in anti-competitive cross ownerships.

If possible, competitive sectors of the industry such as value-added services should not be subject to licensing. Instead, some form of registration should suffice if only to serve as a measure of growth of the sector. This would remove a possible barrier to entry and help to promote entry.

3 Specific comments

3.1 Concurrent jurisdiction

3.1.1 Earlier versions of the Convergence Bill provided for concurrency in jurisdiction between the Competition Commission and ICASA on competition matters. In our submissions to the Department of Communication at the time, we pointed out that in our view concurrent jurisdiction with sector regulators was meant as a temporary measure and is not ideal. Where new legislation, for instance, the Convergence Bill, comes into effect or where amendments to existing legislation occur, concurrency in jurisdiction should be removed.

Although the Competition Act provides for concurrent jurisdiction in respect of sectors wherein a sector regulator has a legislative mandate to investigate and make determinations on competition matters, this was a compromise deal particularly because other legislations, such as the Telecommunications Act of 1996, were passed prior to the enactment of the Competition Act.

However, now that there is specific legislation dealing with competition issues, it is no longer necessary to perpetuate concurrency in jurisdiction in the case of new laws or amendments to existing legislation.

Our view is also consistent with Government’s stance on the issue as outlined in the Policy Framework adopted by the Department of Public Enterprise (An Accelerated Agenda Towards the Restructuring of State Owned Enterprises, August 2000). The Policy Framework recognises the need for introducing competition and that regulation may be necessary where competition is not feasible.

The Competition Commission and Tribunal would like to refer to the recommendation contained in the DPE’s Policy Framework document in respect of what the approach on competition matters should be. We wish to point out that this framework was adopted by Government and should be adhered to as a guide on such matters.

Policy Framework Approach on Restrictive Practices

The Policy Framework recommends that concurrent jurisdiction must be clarified in respect of prohibited practices in transition industries.

The Commission must play a leading role in assessing industry structures and desirable changes. Though the Commission and the regulator should look at competition issues together, the final decision should rest with the Commission. Thus while this recommendation envisages a situation where consultation will occur between the regulators for effective application of competition principles, it is clear that final responsibility for competition matters should rest with the Commission. Sector regulators may be in a better position to assess industry structures and to suggest necessary changes. A competition authority’s primary concern is with market conduct, although such conduct might be influenced by structure. The two agencies consult one another regularly.

In regulated industries with little potential for competition, the regulator should remain the sole actor but with the Commission having the powers to investigate mergers and abuse of dominance by the incumbent. These are industries where competition is not feasible and where the application of competition principles as broad as they are may not achieve the desired efficiencies or social benefits.

In regulated industries with a high degree of competition, the Commission will have sole jurisdiction in all competition matters, but be required to consult with the sector regulator. The final authority on competition should lie with the Commission. The telecommunications and broadcasting sectors might well fall under this category and the Bill must thus reflect this.

Approaches on Mergers and Acquisitions

All mergers must be filed with the Commission based on the required threshold for the Commission to assess such transactions, with the understanding that the Commission will seek advice from other regulatory agencies, where necessary.

Mergers requiring licence transfers will always remain under concurrent jurisdiction. The parties need to file with both the Commission and ICASA. The Commission will look at competition matters while ICASA will look at the licensing aspect. Under no circumstances will ICASA look at competition matters, but it may advise on sector specific issues. The final decision on competition issues will rest with the Commission.

The Policy Framework also states that if there is inconsistency between national and industry specific competition rules, the industry rules on competition must be changed to conform to the current Competition Act.

The above recommendations highlight the approach legislation should take in regulated sectors by looking at the type of sector and the development of markets to allow for competition. It is therefore without doubt that the sector in question has high potential for competition. However, regulation will still be required to determine sector specific aspects such as licensing, access to network facilities, technical compatibility and interconnection between service providers as well as quality of telecommunication services and the interests of consumers.

International examples

In most OECD countries, (See Competition Policy Roundtable: Relationship between Regulators and Competition Authorities) competition authorities are responsible for competition regulation while sector regulators are responsible for technical regulation, which has to deal with setting and enforcing product and process standards designed to deal with safety, environment and switching costs externalities and allocation of publicly owned or controlled resources.

In India, it is clear under the Telecom Regulatory Authority of India Act that if a dispute arises in terms of matters relating to technical compatibility and interconnection between service providers, revenue sharing arrangements, quality of telecommunication services and interests of consumers, such a dispute is to be adjudicated by the Telecom Regulatory Authority of India. The Telecom Regulatory Authority does not have any jurisdiction over matters relating to the monopolistic trade practices, restrictive trade practices, and unfair trade practices that are subject to the jurisdiction of the Monopolies and Restrictive Trade Practices Commission. The Telecom Regulatory Authority of India Act specifically excludes the regulator’s jurisdiction on these matters.

In Australia, these matters are all subject to the competition authority, ACCC, which has a specific section focusing particularly on telecommunications, but ACCC is one of the exceptions wherein the regulatory functions of the competition authorities and sector regulators have been merged.

3.1.9 Adam Smith Institute Report on Concurrent Jurisdiction in SA

3.1.9.1 The Government commissioned a report by the Adam Smith Institute on The Need for Practical Mechanisms to Implement Concurrent Jurisdiction Regimes (a programme of the Support to Restructuring of Public Enterprises in South Africa). This report recommends that in the communications sector, the Convergence Bill should provide for a clear division of responsibility by leaving general competition provisions to the Competition Commission, and that there should be provision for amending licences following an adverse finding by the Competition Tribunal.

Notwithstanding the aforesaid, we recommend constant consultation and a working relationship with ICASA for effective application of competition principles.

Based on the above we strongly support the removal of concurrent jurisdiction in this Bill, as it is clear that concurrency results in all sorts of problems including forum shopping, double jeopardy, and institutional conflict. Moreover, Government’s Policy Framework document of 2000 recommends ceding of competition matters to the relevant institutions in sectors with a high potential for competition, and telecommunication is certainly one such sector.

Competition matters: Section 63

3.2.1 Our main concern with the current draft of the Bill is section 63 more especially subsection (1) which reads thus:

"Subject to the provisions of this Act and of related legislation, the Competition Act, 1998 (Act No 89 of 1998) applies to competition matters in the communications industry".

This provision gives a mistaken connotation that this Bill trumps the Competition Act and that the latter will only be invoked in the event that this Bill fails to address a particular competition matter. We do not believe that this was the intention of the drafters of this Bill.

We therefore recommend, as we have done with the previous drafts of the Bill, that the word ‘subject to’ be replaced with ‘notwithstanding’ so that the Bill is aligned with the Competition Act and any other relevant legislation.

Alternatively section 63 (1) should be deleted as a whole.

Subsection (3) allows the regulator to direct a licensee by written notice to cease or refrain from taking action that would:

have the effect of giving undue preference to; or

cause undue discrimination against

any person or category of persons.

This section therefore allows the regulator to pronounce on a competition matter such as discrimination, which in our view is the prerogative of the competition authorities.

We recommend that the regulator should use regulatory tools available to it to deal with problems envisaged in this section, and that in the event that discrimination occurs, the Competition Act be invoked.

Subsection (4) allows the Authority to prescribe regulations to prevent the kind of discrimination envisaged in the preceding section. Such regulations are meant to, among other things, ensure efficient and effective investigation of anticompetitive actions and the speedy resolution of complaints. It is not clear who would conduct the investigation. The issuing of regulations is one of the Authority’s functions. However, the investigation and speedy resolution of complaints involving anticompetitive conduct is the responsibility of the competition authorities, as already argued in the preceding section.

Subsection (5) identifies the prohibition, locking, blocking or prevention of any end-user equipment from being used with any licensed communications service as anticompetitive. It is not clear why this specific practice is identified as being necessarily anticompetitive. It is recommended that this section be removed. The Competition Act identifies conduct that is anticompetitive. It is for the competition authorities to investigate whether conduct is anticompetitive or not in terms of the Competition Act.

This section also gives the idea of an exhaustive list of anticompetitive conduct. Parties may argue that conduct not listed in this Bill is not anticompetitive. Furthermore, this section gives ICASA jurisdiction on competition issues, which in our opinion should rest solely with the competition authorities.

We strongly recommend that subsections (3), (4) and (5) of section 63 be removed and that subsection (1) be revised accordingly.

3.3 Definitions of "dominance" and "market power"

Our other concern pertains to the definitions of competition terms in the Bill.

It should be pointed out that the Competition Act deals with all these terms and definitions appropriately. There is therefore no need for this Bill to duplicate, let alone provide contradictory definitions to terms adequately dealt with by other legislation.

3.3.2 Section 8 of the Bill deals with the terms and conditions of licences. Sub-section (2) allows the regulator to prescribe additional terms and conditions to certain licences, under certain conditions, including the possession of significant market power. In subsection (3) significant market power is deemed present where a firm is dominant. Market dominance is then defined as the possession of 35% or more market share.

3.3.3 Firstly, the Bill fails to recognize that dominance does not equal market power. In terms of the Competition Act, a firm that has less than 35% market share may be dominant if it possesses market power. Similarly, a firm with more than 35% but less 45% of the market is deemed dominant unless it can prove that it does not have market power. Thus, the definitions of dominance and market power offered in the Bill are at variance with those in the Competition Act. As such, we are concerned that this may be a source of legal wrangling by industry players in the future. For instance, a firm that is considered dominant in terms of the Competition Act may argue that it is not in terms of the Convergence Bill.

3.3.4 Secondly, the use of the adjective ‘significant’ as a prefix to the term ‘market power’ is unwarranted since it is not defined. In the absence of a definition, ‘significant’ remains subjective and open to conflicting interpretations.

3.3.5 This is not acceptable. We therefore recommend that the terms ‘dominance and ‘market power’ be aligned to the Competition Act not only for the sake of legislative consistency but also to prevent future exploitation of this gap by litigants.

Further the adjective ‘significant’ should not be used because of its subjectivity. In any event, the Competition Act speaks of ‘market power’ only and not ‘significant market power’.

These are the types of clauses that give the regulator power to pronounce on competition matters and in our view, this is wrong.

4 Summary

4.1 In conclusion, we support the removal of concurrent jurisdiction in the communications sector. However, we wish to reiterate the importance of consultation and cooperation with the regulator on specific sector issues, where appropriate, instead of creating concurrent jurisdiction.

Section 63 (1) should read in such a manner that the Competition Act applies to the communications sector as it does in all sectors with no conditions attached.

Subsections (3), (4) and (5) of section 63 should be deleted. They are confusing.

Where definitions and terms are used, these should be in line with the Competition Act and not contradictory.

4.3 On the issue of dealing with investigations into anticompetitive conduct in the sector, it is our view that there is no need for duplication of roles. The competition authorities should undertake this function. All reference to the Authority (ICASA) investigating such cases should be removed from the Bill.